A Fragile Global Recovery

By IBT Staff Reporter On 11/16/09 AT 3:27 PM

Recent economic data from some of the world's largest industrial regions suggests that the world may be moving towards growth, however the largely government manufactured recovery leaves open the question as to whether recovery can be sustainable.

Japan's economy rebounded sharply in the third quarter, growing at a strong annualized rate of 4.8 percent, making the country's second consecutive quarter of expansion. Likewise, the euro zone economy jumped out of recession in the third quarter with GDP growing 0.4 percent, the first quarter-on-quarter expansion since the first the months of 2008.

While there are some factors of hard growth, a majority of the gains can be attributed to two things: strong regional fiscal policy, luring consumers into auto dealerships and electronics stores, and therefore boosting consumer spending; and factories replenishing inventories in hopes that things pick up later.

Pertaining to the former, exports played a large role in euro zone growth, with economists believing that part of that was due to car sales lifted by scrappage subsidies. Germany's subsidies, in particular, amounted to €5bn.

The problem is, this spur to growth is now likely to fade, and even reverse, in the months ahead, said Colin Ellis of Daiwa Securities told clients. This is because the car scrappage schemes ... do not generate new spending that would never have happened without the schemes.

Government incentives played a hand in Japan also, with consumer spending, accounting for more than half of Japan's GDP, rising 0.7 percent on quarter, compared with a revised 1 percent climb in the second quarter.

Sales of environmentally friendly goods may drop without the stimulus, with eco-friendly auto's standing to shed up to 10 percent of sales according to the Japan Research Institute.

Japan's new Democratic Party government has expressed commitment to policy that boosts household budgets, which may boost consumer spending in the long term.

Inventories in both the euro zone and Japan made a strong showing in recent GDP reports as well.

Manufacturers, either filling their supply lines from the plunge seen in previous quarters, or stocking up for expected future demand, have given a boost to the GDP, but all of this can prove to be temporary if that demand does not pan out.